Updated: Sep 27
January 15, 2020
CWC President Chris Weil explains why one of our core activities is to undertake a review of client family financial circumstances at least once a year.
“Review my estate plan” is not usually high on the list of typical New Year’s resolutions. Nor will your heart likely skip a beat (as it might, for example, if someone slips you a hot stock idea) when your lawyer or your accountant or your financial advisor tells you that it’s time to update your estate plan. Estate planning – like going to the dentist – is one of those activities most people view as at best a bore and at worst a trial. Who wants to plow through thirty or forty pages of densely written text, some of which (even despite your attorney’s best efforts to simplify) remains incomprehensible? And what’s worse: at some level you know you’re in the process of memorializing plans for an event you almost certainly don’t want to happen, that is going to have some serious (and, at least perhaps, unintended) consequences.
So you put “estate planning” on your to-do list – where it remains with your other aspirational “objectives” (lose weight, read War and Peace, collect debt from brother-in-law, visit mother more often). Your intentions are honorable, but somehow another year goes by and “estate planning” never makes its way to the top of the list. Which is a shame ... or worse than a shame. The documents that constitute your estate plan fix your intentions as to who gets what, when and how much (and who makes the decisions as and when decisions have to be made) at the moment of document execution.
That said, it may be an exaggeration – but not a misrepresentation – to say that every estate plan, even the simplest and the most elegant, is basically obsolete the day after it is executed.
Why? Because the documents, the terms and conditions of which are fixed, reflect a tacit assumption that the lives of you and your family will remain unchanged, such that what was applicable in your plan at the time of signing will be applicable at the time some future event causes plan provisions to be triggered. But life doesn’t work that way. Plan terms and conditions are static, but lives are dynamic. There are (again, to exaggerate) a thousand changes in life circumstances over time that should, but often don’t, trigger so much as a tweak, let alone a substantive modification, to your estate plan.
The law recognizes this static versus dynamic “disconnect” and so provides for plans to be amended or restated as and when life circumstances dictate a needful change. But see paragraphs one and two above. We often discover client plans written five or even ten years ago or more with no changes since then, even though current client circumstances are materially different.
How different? If I had the time, and you had the patience, I probably could put together a list of “a thousand material changes in life circumstance that should trigger review of an estate plan,” but here are ten representative ones:
change in state of residence;
disability or other special needs of a child or grandchild;
cognitive issues with one (or both) spouse(s);
significant income discrepancies between adult children;
insufficient liquidity to pay estate tax liability (creating a need to borrow or sell assets);
material increases (or decreases) in family wealth;
uncollectable debt owed to parents by an adult child; and
the creation of an irrevocable sub-trust (by virtue of the death of a spouse) which contains terms that neither spouse would have wanted had the master trust been modified before the first death.
It is a truism that, as we age, as our income and/or net worth increases, and as our families grow, our financial lives become more complex. It is rare for families of means not to have both one-off and continuing events that require them to deal with the “thousand changes” in their current lives and in the provisions of their estate plans ... and this doesn’t even take into account periodic changes in trust and estate law. (I sometimes hear from clients who complain about the number of K-1’s they receive every year. My response: that is one of the prices you pay for wealth. Having to deal with the “thousand changes” is another of the prices you pay.) And, by the way, there is nothing wrong with seeking to simplify your life and thus your estate plan. But in many cases, simplification is not in the cards. It’s not in the cards if you have any mix of the following: a substantial portfolio of liquid assets, ownership of a business, children and grandchildren, a large retirement plan, material stock option positions, a significant real estate portfolio, dependent parents ... I could go on.
Note that I include the estate plans of “even the simplest” estates as subject to obsolescence, at least the “simple” estates of people of substantial means. Such estates (however substantial) can be “simple” in the sense that, first, there are relatively few asset accounts (typically, a home, cash, after-tax liquidity, retirement accounts, perhaps a few private investments); second, there are few or no liabilities; third, there are obvious heirs (usually a child or children) who are adult, financially responsible, and in good health; and fourth, there is usually a living trust in place, of which the spouses are joint trustees, that allow the surviving spouse to continue as sole trustee after the first death, and that require trust assets to be distributed to heirs (and the trust closed) after the second death.
In this “simple” estate illustration, an aged estate plan may still be “current” (despite having been drafted some years ago) if the conditions that existed at the time of drafting still exist. But often appearances can be deceptive, so even where there is comfort with the existing plan terms there needs to be a plan review every few years. If nothing else, such a review will allow a re-thinking of plan terms in light of legal and tax changes since the last draft. Is it time to review existing life insurance coverage? (For example, we often find that policy ownership is still in the name of the insured, which could result in the unnecessary ballooning of estate values and the possibility that some portion of insurance proceeds will be subject to estate tax, particularly if the current estate tax exemption sunsets.) Is it time to consider gifts to children? (This may be particularly important if the estate is not subject to an estate tax today, but would be as/when the current exemption declines, as it is scheduled to do in January 2026.) Is it time to review medical and financial powers of attorney? (Are those originally named as decision makers still the spouse’s choices?)
At CWC, one of our core activities is to undertake a review of client family financial circumstances at least once a year. As part of that review, we review key provisions of estate planning documents. Our job is to ask the right questions and uncover areas of possible concern. Then, with that information in hand, we encourage the client family to consult with their estate planning attorney to determine whether (and to what extent) a re-fresh (“amendment”) or re-draft (“restatement”) of estate planning documents is warranted.
What follows are a few examples, culled from our long experience, of how a lack of planning or lack of foresight can put ultimate estate planning goals in jeopardy. (No names here; but some of the facts have been changed to protect the innocent.) In some of these cases, clients came to us with problems that we were able to identify and help fix. In others, the die had already been cast when we got our first look at the plan (because of a death, for example). In still others, clients never “got around” to letting us review their plans until it was too late to offer appropriate recommendations. In most cases, assets still made their way to the next generation, but there were taxation, emotional, logistical, and familial issues that could have been avoided or lessened with some focused attention.
Stale Beneficiary Designation
One of our clients created modest havoc in his estate plan by forgetting to update the beneficiary form with a long-ago employer’s 401(k) plan. The client had divorced, but the form of the old plan still named his first wife. He had updated his trust to name his current spouse, but this did not automatically change the 401(k) beneficiary designation. Doing that would have required the client to sign and submit a beneficiary election form for that specific retirement plan. When his heirs came to us for advice, we quickly discovered that, by neglecting to provide his former employer with a new form, he had inadvertently caused the assets of his retirement plan to go to the wife from whom he had divorced decades earlier, much to the chagrin of his widow and grown children.
The Danger of Dollars
More than once we have encountered clients who drafted estate plans in the mistaken belief that the value of the assets in their portfolios would be the same, or higher, than when they ultimately passed. People who draft trusts with specific dollar amounts to be distributed to particular heirs (including, for example, a monthly value to be provided to a spouse or child until his or her passing) run the risk that the value of estate assets will make those specific distributions an outsized part of the estate. In the case of one client, the estate was obligated to distribute out large amounts of support to specific beneficiaries, reducing the inheritance of others in a way that was almost certainly not the client’s intention. If the client had specified percentages to be distributed to heirs instead of dollars, the estate would have been more manageable by the heirs and there would not have been a need for shuffling estate assets to meet the unduly rigid provisions governing distributions to the client’s wife and children.
Tying bequests to dollar-amount indicators that are “subject to change,” can be similarly problematic, as one client learned when his wife passed not long after Congress increased the federal estate tax exemption. The couple’s plan had been set up to establish, at the first passing, a trust for their lone granddaughter in the amount of the estate tax exemption (which was $675,000 at the time the document was drafted). That was a generous gift at that time (about 10% of the couple’s estate), but nothing compared to the $5,000,000 that should, by the terms of the trust document, have been put into the granddaughter’s trust when her grandmother passed (by which time the exemption had been raised to $5,000,000, or about 70% of the grandparents’ estate). Fortunately, friendly relations among the granddaughter, her grandfather, her parents and her aunts and uncles made it possible to amend the trust to conform to grandma and grandpa’s evident intent. Unfortunately, doing so required hiring a lawyer and going to court to make the amendment official.
The Benefit of a Second Pair of Eyes
We noticed a potential problem in the estate documents of another client who tried to do something a little unconventional and may have run afoul of an apparent drafting mistake by his attorney. The client had two children, only one of whom had children of her own (four, as it happens). The client had intended to split his estate three ways: one third for his son, one third for his daughter, and one third to be shared among his four grandchildren. As originally drafted, however, the document appeared to provide for the estate to be divided six ways (one share for each of his heirs). Because of inartful drafting, the son and daughter each stood to get one sixth of the estate instead of one third.
Contemplation of the Unthinkable
The father of an only child, long-since estranged from the child’s mother, made provisions in his trust to leave his entire estate, in trust, to his son, and then to his son’s descendants. This is a standard trust provision, designed to minimize estate taxes by “skipping” one generation. In this case, however, the son died quite young, leaving only one child, a daughter (the granddaughter of our client). In this event, provisions that make perfect sense while the son was alive, would have provided the granddaughter with great wealth, far earlier than the grandfather could have foreseen. (Between her father’s estate and her grandfather’s, she would have become a multi-millionaire at age 21 in the event her grandfather died without changing his trust.) It was no easy task for the grandfather – with his son having passed relatively recently (and very prematurely) – to sit down and figure out how best to provide for his granddaughter without “bestowing” millions of dollars directly on her before she was ready to deal with the consequences. It is cases like this, however, that call for some of the most sophisticated estate planning, and reward those who are willing to consider an uncertain future with a clear eye.
Best Laid Plans
While we are discussing instructive anecdotes, we should acknowledge that even the best laid plans (or best planned estates) can encounter hiccups. That, at least, was what happened with one client who had told his two sons, his only heirs, they were to divide his trust estate equally upon his passing. (Their mother had passed some years earlier.) He had not shared many details of his estate plan with his sons (and we had no pre-existing relationship with them), but they had assumed not only that they were his sole heirs (which they were) but also that the transfer of his assets would be essentially instantaneous upon his death ... and they had planned (in an unseemly way) accordingly. At their father’s death, when the provisions of his trust were revealed, they both contacted us with an urgent need for cash to repay borrowing they had done while their father’s health declined. They had no idea that we needed to jump through several hoops before dollars could be distributed (like getting a certified copy of their father’s death certificate, opening a new “administrative trust” account, collecting life insurance proceeds, etc.). Our client had missed an opportunity to lay out a timeline for his sons, to ensure a smooth transition of assets where they were comfortable with understanding how long they would need to wait until they were to receive their respective inheritances. Establishing and communicating a timeline for inheritance after passing is a key element to expectation-setting for heirs.
The Bottom Line
For the one or two of you still with me here who want further details on estate planning traps, please refer to our Mid-Quarter newsletter by CWC Advisor Jon Strauss from June 2019, in which he identified the 5 biggest estate planning mistakes. For the vast majority of you (who have, perhaps, heard more than enough), only one thing is needful: if you have not done so recently, reach out to any one of the advisors here at CWC, or make an appointment with your own estate attorney, and ask what you need to do to make sure your estate plan is in good shape ... at least for today.
~ Chris Weil
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